Lawarre v. Fifth Third Secs., Inc. , 2012 Ohio 4016 ( 2012 )

[Cite as Lawarre v. Fifth Third Secs., Inc., 2012-Ohio-4016.]
IN THE COURT OF APPEALS
FIRST APPELLATE DISTRICT OF OHIO
HAMILTON COUNTY, OHIO
WILLIAM LAWARRE, : APPEAL NO. C-110302
TRIAL NO. A-0909076
JOHN PAPA, :
O P I N I O N.
EAGLE FLIGHT INVESTMENTS, :
INC.,
:
PROPERTY ASSET MANAGEMENT,
LTD., :
and :
LAJ, INC., :
Plaintiffs-Appellants, :
vs. :
FIFTH THIRD SECURITIES, INC., :
and :
FIFTH THIRD BANK, :
Defendants-Appellees. :
Civil Appeal From: Hamilton County Court of Common Pleas
Judgment Appealed From Is: Affirmed
Date of Judgment Entry on Appeal: September 5, 2012
Santen & Hughes, Charles E. Reynolds, J. Robert Linneman and Brian P. O’Connor,
for Plaintiffs-Appellants,
Keating, Muething & Klekamp, PLL, James E. Burke and Joseph M. Callow, Jr., for
Defendants-Appellees.
Please note: This case has been removed from the accelerated calendar.
OHIO FIRST DISTRICT COURT OF APPEALS
D INKELACKER , Judge.
{¶1} Plaintiffs-appellants William LaWarre, John Papa, Eagle Flight
Investments, Inc., Property Asset Management, LTD, and LAJ, Inc., appeal the
decision of the Hamilton County Court of Common Pleas granting summary
judgment in favor of defendants-appellees Fifth Third Securities, Inc., and Fifth
Third Bank. We find no merit in their assignments of error, and we affirm the trial
court’s judgment.
I. Facts and Procedure
{¶2} The record shows that LaWarre and Papa were customers of Fifth
Third Bank and Fifth Third Securities. Papa was the sole owner of plaintiffs-
appellants Eagle Flight Investments, Inc., Property Asset Management, Ltd., and
LAJ, Inc. These companies were not operating business entities, but passive vehicles
through which Papa held investment funds. Consequently, we refer to them
collectively as “Papa,” where appropriate.
{¶3} Fifth Third Bank and Fifth Third Securities were separate
corporations, but they operated together informally as Fifth Third Financial
Advisors. They shared certain employees, including Dan Hughes, Kathy Collins, and
Jana Sturgeon. Consequently, we refer to them collectively as “Fifth Third” where
appropriate.
{¶4} Collins was LaWarre’s private banker at Fifth Third Bank and
Sturgeon was Papa’s. In 2006, Collins and Sturgeon introduced their clients to
Hughes, who was an investment advisor at Fifth Third Securities. Hughes
recommended that LaWarre and Papa invest their money in options trading. Both
Papa and LaWarre met with Hughes before agreeing to invest their funds with him.
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They both signed applications and other documents, which contained disclaimers
describing the risks of options trading. The disclaimers stated:
I specifically affirm the following disclosures
***
That both the purchase and the writing of options
contracts involve a high degree of risk, are not suitable
for many investors and, accordingly, should be entered
into only by investors who understand the nature and
extent of their rights and obligations and are fully aware
of the inherent risk involved, especially during extreme
market volatility or trading volumes.
That I should not purchase any option unless I am able
to sustain a total loss of the premium and transaction
costs * * *.
{¶5} Both LaWarre and Papa made substantial returns on their
investments in 2007 while Hughes was trading for Fifth Third. LaWarre stated that
he had had no problems with Hughes during the time that Hughes had been trading
for Fifth Third. Papa also testified in his deposition that he had been comfortable
with the trading activity by Hughes during that time.
{¶6} Fifth Third became concerned about the risk involved with Hughes’s
trading strategy. It became a subject of ongoing review by his supervisors.
Eventually, Fifth Third imposed a six-month supervisory restriction on Hughes and
all of his clients’ accounts. Any transactions he undertook were the subject of special
scrutiny. Eventually, Fifth Third’s legal-compliance department approved Hughes’s
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OHIO FIRST DISTRICT COURT OF APPEALS
option-trading strategies for use in his clients’ accounts and released him from the
supervisory restriction.
{¶7} Subsequently, Fifth Third proposed to change the fee structure of
Hughes’s clients’ accounts. The change would have resulted in large increases in the
fees charged to his clients, which Hughes believed would adversely affect his ability
to retain and serve his clients. As a result, in September 2007, he left Fifth Third and
began working at a new firm, Fosset Hughes and Jabin Investments (“FHJ”).
{¶8} Fifth Third met with LaWarre and Papa and presented them with
alternative investment strategies, in an attempt to keep their business. But both of
them voluntarily transferred their investment accounts to FHJ so that they could
continue investing with Hughes. After that time, LaWarre and Papa did not receive
any further investment advice from Fifth Third.
{¶9} While their accounts were at FHJ, LaWarre and Papa suffered
substantial losses, totaling millions of dollars. For a while, Hughes sought to conceal
the losses by falsifying monthly account statements. Eventually, Hughes told his
clients about the losses. LaWarre continued to work with Hughes, who developed a
new investment strategy in early 2008 in an attempt to limit LaWarre’s losses.
Nevertheless, LaWarre continued to lose money. LaWarre lost over $6 million and
Papa lost over $2 million.
{¶10} LaWarre and Papa filed suit against Fifth Third, raising numerous
causes of action that included negligence, breach of fiduciary duty, and fraud. The
trial court granted summary judgment in favor of Fifth Third on all of LaWarre’s and
Papa’s claims based primarily on its analysis of Herbert v. Banc One Brokerage
Corp., 93 Ohio App.3d 271, 638 N.E.2d 161 (1st Dist.1994). This appeal followed.
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II. Tort Claims
{¶11} LaWarre and Papa each assert a single assignment of error. They
contend that the trial court erred in granting summary judgment in favor of Fifth
Third. First, they argue that the trial court improperly granted judgment on their
tort claims based on an unwarranted extension of dicta in Herbert. We find no merit
in this argument.
{¶12} LaWarre and Papa raised several tort claims against Fifth Third.
They included negligence in the giving of investment advice, negligent
misrepresentation, and negligent supervision. The elements of any negligence claim
are duty, a breach of that duty, and injury proximately resulting from that breach.
Menifee v. Ohio Welding Products, Inc., 15 Ohio St.3d 75, 76, 472 N.E.2d 707 (1984);
Vonderhaar v. Cincinnati, 191 Ohio App.3d 229, 2010-Ohio-6289, 945 N.E.2d 603, ¶
19 (1st Dist.).
{¶13} LaWarre and Papa also set forth claims for breach of fiduciary duty.
A fiduciary is “a person having a duty, created by his undertaking, to act primarily for
the benefit of another in matters connected to his undertaking.” Groob v. Keybank,
108 Ohio St.3d 348, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 16; Health Alliance of
Greater Cincinnati v. Christ Hosp., 1st Dist. No. C-070426, 2008-Ohio-4981, ¶ 20.
A fiduciary relationship is “a relationship in which special confidence and trust is
reposed in the integrity and fidelity of another and there is a resulting position of
superiority or influence, acquired by virtue of this special trust.” Groob at ¶ 16;
Health Alliance at ¶ 20. A broker or financial advisor has a fiduciary relationship
with his clients. Mathias v. Rosser, 10th Dist. Nos. 01AP-768 and 01AP-770, 2002-
Ohio-2772, ¶ 18; Byrley v. Nationwide Life Ins. Co., 94 Ohio App.3d 1, 18, 640
N.E.2d 187 (6th Dist.1994).
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶14} In Herbert, the case relied upon by the trial court, the plaintiffs were
customers of Bank One. The bank had a business relationship with Banc One
Brokerage Corporation in which the brokerage rented space in one of the bank’s
offices and the bank referred customers to the brokerage.
{¶15} The brokerage employed Randall Clark as a securities salesperson.
The bank’s employees referred customers to Clark, who sold investment securities,
life insurance, and annuities to the bank’s customers, including the plaintiffs. The
bank made financial information about its customers available to Clark without the
customers’ consent. It did not disclose to customers that Clark was not its employee.
{¶16} While employed by the brokerage, Clark developed a relationship
with Harry Fleischhauer, who was engaged in a scheme to sell unregistered and
worthless securities to investors. Clark began referring investors to Fleischhauer,
and eventually left the brokerage to work for him. Clark used the bank’s customer
lists to solicit investors. Some of the bank’s depositors brought letters that they had
received from Clark to the bank’s and the brokerage’s attention. But bank and the
brokerage did nothing to warn their customers about the bad investments. Clark
sold worthless securities to the plaintiffs and they lost the funds that they had
invested.
{¶17} The plaintiffs filed suit against the bank and the brokerage for
negligence and breach of fiduciary duty alleging that they had failed to protect the
plaintiffs or to notify them about the sale of the worthless securities. The trial court
granted the defendants’ motion to dismiss the complaint because it had been filed
outside the statutory limitations period and because it had failed to state a claim
upon which relief could be granted under Civ.R. 12(B)(6). While we held that the
trial court properly dismissed the complaint because it had been filed outside the
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limitations period, we also addressed the merits of the trial court’s decision to
dismiss the case for failure to state a claim.
{¶18} We noted that ordinarily no duty exists to prevent a third person from
causing harm to another, except in cases where a special relationship exists between
the actor and the third person that gives rise to a duty to control, or between the
actor and another that gives the other the right to protection. Herbert, 93 Ohio
App.3d at 276, 638 N.E.2d 161. Thus, there is no liability in the absence of a special
duty owed by a particular defendant. Id. “The fact that the actor realizes or should
realize that action on his part is necessary for another’s aid or protection does not of
itself impose upon him a duty to take such action.” Id. at 277, 638 N.E.2d 161,
quoting Hill v. Sonitrol of Southwestern Ohio, Inc., 36 Ohio St.3d 36, 39-40, 521
N.E.2d 780 (1988).
{¶19} We stated that “[a] principal is not liable for the actions of its agent
unless done while engaged in duties within the scope of his employment. Brokerage
owed no duty to [the plaintiffs] to protect them as to transactions with Clark
following his departure from Brokerage.” (Citations omitted.) Herbert, 93 Ohio
App.3d at 278, 638 N.E.2d 161.
{¶20} The same logic applies in this case. We agree with the trial court that:
Plaintiffs voluntarily transferred their investment
accounts to a new firm. Both wanted to follow their
broker to his new firm because they liked Mr. Hughes’
strategy and both were making money. They suffered no
losses while at Fifth Third and voluntarily allowed Mr.
Hughes to trade options on their behalf. When Mr.
Hughes left Fifth Third, they could have kept their
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OHIO FIRST DISTRICT COURT OF APPEALS
investments with Fifth Third but decided to transfer
their accounts to FHJ. Unfortunately, they ultimately
suffered substantial losses while at FHJ. However, Fifth
Third cannot be held responsible for losses sustained
after Plaintiffs had left Fifth Third.
{¶21} Simply put, once Hughes had left Fifth Third, and LaWarre and Papa
had transferred their investments to Hughes’s new firm, Fifth Third no longer owed
them a duty. Therefore, it could not, as a matter of law, be held liable for negligence
or breach of fiduciary duty for Hughes’s conduct after he had left Fifth Third.
{¶22} LaWarre and Papa argue that even if Fifth Third was not responsible
for Hughes’s conduct after he left Fifth Third, they were responsible for what he had
done while he worked there. They presented evidence that while Hughes was at Fifth
Third, his superiors took issue with his risky investment strategies. Both LaWarre
and Papa testified that they had trusted their initial contacts at Fifth Third and they
had trusted Hughes. They stated that if Fifth Third had disclosed to them its
concerns about Hughes’s strategy, they might not have trusted Hughes so implicitly.
They argue that if they had understood the substantial amount of risk involved and
the concept that losses were inevitable, they might not have followed Hughes to his
new employer and might have stayed with Fifth Third.
{¶23} But Fifth Third had warned both LaWarre and Papa that options
trading was risky in general. The disclaimer in the documents they both signed
specifically stated that options trading involved a “high degree of risk.” They did not
suffer any losses while Hughes was employed at Fifth Third. They voluntarily
transferred their accounts to Hughes’s new firm, despite the fact that Fifth Third
tried to convince them to keep their investments with Fifth Third. Fifth Third’s
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OHIO FIRST DISTRICT COURT OF APPEALS
employees called both LaWarre and Papa and discussed the risks of options trading.
They offered to help them with alternative investment strategies that involved less
risk, but less return. LaWarre and Papa turned down their offers, and did not seek
any investment advice from Fifth Third after September 2007. They signed new
disclosure agreements with FHJ and agreed to continue to invest in options trading
in 2008 and 2009. They did not sustain losses until 2008 and 2009, when Hughes
was employed at FHJ.
{¶24} The record shows that Fifth Third met its initial burden to
affirmatively demonstrate that its conduct did not cause LaWarre and Papa harm.
See Gedra v. Dallmer Co., 153 Ohio St. 258, 91 N.E.2d 256 (1950), paragraphs one
and three of the syllabus; Cipollone v. Hoffmeier, 1st Dist. No. C-060482, 2007-
Ohio-3788, ¶ 24. LaWarre and Papa failed to meet their reciprocal burden to set
forth specific facts showing that a genuine issue of material fact existed for trial. See
Dresher v. Burt, 75 Ohio St.3d 280, 293, 662 N.E.2d 264 (1996); Stinespring v.
Natorp Garden Stores, 127 Ohio App.3d 213, 216, 711 N.E.2d 1104 (1st Dist.1998).
{¶25} We find no material issue of fact. Construing the evidence most
strongly in LaWarre’s and Papa’s favor, we hold that reasonable minds can come to
but one conclusion—that any breach of duty by Fifth Third did not cause harm to
LaWarre and Papa. Fifth Third was entitled to judgment as a matter of law on their
negligence and breach-of-fiduciary-duty claims, and the trial court did not err in
granting summary judgment in Fifth Third’s favor on those claims. See Temple v.
Wean United, Inc., 50 Ohio St.2d 317, 327, 364 N.E.2d 267 (1977); Greene v.
Whiteside, 181 Ohio App. 3d 253, 2009-Ohio-741, 908 N.E.2d 975, ¶ 23 (1st Dist.);
Stinespring at 215.
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OHIO FIRST DISTRICT COURT OF APPEALS
III. Breach of Contract
{¶26} Next, LaWarre and Papa argue that the trial court erred in granting
summary judgment in favor of Fifth Third on their breach-of-contract claims. They
argue that Herbert does not control contract claims, and that Fifth Third breached
the contract by recommending unsuitable investments and failing to warn them
about the risks of Hughes’s investment scheme. They also argue that Fifth Third
breached its obligation to act in good faith. While we agree that Herbert, which
involved tort claims, does not control the instant contract claims, we find no merit in
their other arguments.
{¶27} We first note that the option account agreement specifies that “[t]his
Agreement and its enforcement shall be governed by the laws of the Commonwealth
of Massachusetts[.]” Because the parties made an effective choice of law in the
agreement, we apply Massachusetts law in interpreting it. See Schulke Radio
Productions, Ltd. v. Midwestern Broadcasting Co., 6 Ohio St.3d 436, 453 N.E.2d
683 (1983), syllabus; Dubuc Lucke & Co., Inc. v. Walker, 143 Ohio App.3d 595, 598,
758 N.E.2d 738 (1st Dist.2001).
{¶28} The interpretation of a written instrument is a question of law for the
court, which will enforce unambiguous language according to its terms. Cody v.
Connecticut Gen. Life Ins. Co., 387 Mass. 142, 146, 439 N.E.2d 234 (1982);
Freelander v. G. & K. Realty Corp., 357 Mass. 512, 516, 258 N.E.2d 786 (1970).
Contracts are to be construed “according to the fair and reasonable meaning of the
words in which the agreement of the parties is expressed.” Cody at 146, quoting
MacArthur v. Massachusetts Hosp. Serv., Inc., 343 Mass. 670, 672, 180 N.E.2d 449(1962). But courts must construe ambiguous language to give effect to the parties’
probable intent. Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39,
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OHIO FIRST DISTRICT COURT OF APPEALS
45-46, 577 N.E.2d 283 (1991); J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789,
795, 494 N.E.2d 374 (1986); Janeczek v. Heavey, Middlesex Sup.Ct. No. 88-6694,
1992 Mass.Super. LEXIS 1, *6.
{¶29} Courts must construe a contract to give reasonable effect to all of its
provisions. J.A. Sullivan Corp. at 795. “[E]very phrase and clause must be
presumed to have been designedly employed, and must be given meaning and effect,
whenever practicable, when construed with all the other phraseology contained in
the instrument, which must be considered as a workable and harmonious means for
carrying out and effectuating the intent of the parties.” Id., quoting Charles I.
Hosmer, Inc. v. Commonwealth, 302 Mass. 495, 501, 19 N.E.2d 800 (1939).
{¶30} To prevail on a breach-of-contract claim, a party must demonstrate by
a preponderance of the evidence: (1) that the parties reached a valid and binding
agreement; (2) that the defendants breached the terms of that agreement; and (3)
that the nonbreaching party suffered damages as a result of the breach of contract.
Towner v. Bennington Constr. Co., Inc., Plymouth Sup.Ct. No. 90724, 2005
Mass.Super. LEXIS 534, *30, citing Michelson v. Digital Fin. Servs., 167 F.3d 715,
720 (1st Cir.1999). Summary judgment is appropriate in breach-of-contract cases
because the court may interpret the meaning of the contract as a matter of law. New
England Power Co. v. Norwood, Worcester Sup.Ct. No. 98-2650A, 2001
Mass.Super. LEXIS 89, *30-31, citing ER Holdings, Inc. v. Norton Co., 735 F.Supp.
1094, 1097 (D.Mass.1990).
{¶31} The record does not demonstrate that Fifth Third failed to perform an
essential contractual obligation. See Marks v. Southcoast Hosp. Groups, Inc., 29
Mass.L.Rep. 277, 2011 Mass.Super. LEXIS 325, *37 (Plymouth Sup.Ct.2011). The
contract contains unambiguous language specifically warning LaWarre and Papa
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OHIO FIRST DISTRICT COURT OF APPEALS
about the risks of options trading. Both LaWarre and Papa were sophisticated
investors and had relatively equal bargaining power with Fifth Third. See Harris v.
McIntyre, Suffolk Sup.Ct. No. 94-3597-H, 2000 Mass.Super. LEXIS 181, *30. By
signing the contract, they acknowledged that they were “fully aware” of the risks.
{¶32} Further, the record does not demonstrate that they incurred damages
as the result of Fifth Third’s failure to perform any of its obligations under the
contract. To establish a prima facie case of breach of contract, a party must show
that he suffered damages as a result of the other party’s breach of contract. Kilgallon
v. Clear Channel Communications, Inc., 23 Mass.L.Rep. 75, 2007 Mass.Super.
LEXIS 371, *11 (Norfolk Sup.Ct.2007).
{¶33} The undisputed facts show that LaWarre and Papa made money from
their investments while they invested with Hughes at Fifth Third. They voluntarily
followed Hughes to his new firm even though Fifth Third tried to persuade them to
stay with Fifth Third and put their money in safer investments. LaWarre and Papa
lost money only after they had taken their investments out of Fifth Third, and Fifth
Third had no control over what occurred.
{¶34} LaWarre and Papa also argue that that Fifth Third violated its duty to
act in good faith. Every contract contains an implied duty of good faith and fair
dealing. Anthony’s Pier Four, Inc. v. HBC Assoc., 411 Mass. 451, 473, 583 N.E.2d
806 (1991); Owen v. Kessler, 56 Mass.App.Ct. 466, 471, 778 N.E.2d 953 (2002).
Good faith performance or enforcement of a contract “emphasizes faithfulness to an
agreed common purpose and consistency with the justified expectations of the other
party.” Tufankjian v. Rockland Trust Co., 57 Mass.App.Ct. 173, 177, 782 N.E.2d 1(2003). “The implied covenant of good faith and fair dealing provides that ‘neither
party shall do anything that will have the effect of destroying or injuring the right of
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OHIO FIRST DISTRICT COURT OF APPEALS
the other party to receive the fruits of the contract[.]’ ” Anthony’s Pier Four at 471-
472, quoting Druker v. Roland Wm. Jutras Assoc., Inc., 370 Mass. 383, 385, 348
N.E.2d 763 (1976).
{¶35} A violation of this covenant usually requires more than a simple
breach of contract. Targus Group Internatl., Inc. v. Sherman, 76 Mass.App.Ct. 421,
435, 922 N.E.2d 841 (2010). Usually, a breach of the covenant involves bad-faith
conduct “implicating a dishonest purpose, consciousness of wrong, or ill will in the
nature of fraud.” Id., quoting Equip. & Sys. for Industry, Inc. v. Northmeadows
Constr. Co., 59 Mass.App.Ct. 931, 932-933, 798 N.E.2d 571 (2003). The covenant is
limited in scope and cannot create rights and duties not otherwise provided for in the
contract. Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376,
385, 805 N.E.2d 957 (2004); McQueen v. True Partners Consulting, LLC, 28 Mass.
L.Rep. 411, 2011 Mass.Super. LEXIS 108, *23 (Norfolk Sup.Ct.2011).
{¶36} The record shows that Fifth Third did not violate its duty of good
faith. The contract language specifically warned LaWarre and Papa that options
trading was risky and that they could lose their investment. By signing the contracts,
they affirmed that they understood the risks involved. Further, since the contract
specifically set forth the dangers of options trading, LaWarre and Papa cannot
contradict the plain language of the contract by arguing that Fifth Third failed to act
in good faith.
{¶37} We find no issues of material fact. Construing the evidence most
strongly in LaWarre’s and Papa’s favor, we hold that reasonable minds can come to
but one conclusion—that Fifth Third did not breach the contract and that it’s conduct
did not cause injury to LaWarre and Papa. Fifth Third was entitled to judgment as a
matter of law on the breach-of-contract claims, and the trial court did not err in
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OHIO FIRST DISTRICT COURT OF APPEALS
granting summary judgment in Fifth Third’s favor on those claims. See Temple, 50
Ohio St.2d at 327, 364 N.E.2d 267; Greene, 181 Ohio App. 3d 253, 2009-Ohio-741,
908 N.E.2d 975, at ¶ 23; Stinespring, 127 Ohio App.3d at 215, 711 N.E.2d 1104.
IV. Statutory Claims
{¶38} LaWarre and Papa argue that the trial court erred in dismissing their
claims based on Ohio and Kentucky securities laws. They argue that Herbert is not
dispositive of those claims, and that Fifth Third failed to meet its initial burden to
show that it was entitled to summary judgment on those issues.
{¶39} The Ohio Securities Act, which is generally referred to as the Ohio
Blue Sky Law, was adopted to prevent the fraudulent exploitation of the investing
public through the sale of securities. In Re Columbus Skyline Securities, Inc., 74
Ohio St.3d 495, 498, 660 N.E.2d 427 (1996). LaWarre and Papa rely on provisions
of the Ohio and Kentucky statutes that prohibit fraud or fraudulent nondisclosure.
See R.C. 1707.44(B), (G) and (M); Ky.Rev.Stat.Ann. 292.320(1) and (2).
{¶40} R.C. 1707.01(J) states:
“Fraud,” “fraudulent,” “fraudulent acts,” “fraudulent
practices,” or “fraudulent transactions” means anything
recognized on or after July 22, 1929, as such in courts of
law or equity; any device, scheme, or artifice to defraud,
or to obtain money or property by means of any false
pretense, representation, or promise; any fictitious or
pretended purchase or sale of securities; and any act,
practice, transaction or course of business relating to the
purchase or sale of securities that is fraudulent or that
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OHIO FIRST DISTRICT COURT OF APPEALS
has operated or would operate as a fraud upon the seller
or purchaser.
{¶41} The statute indicates that that the definition of fraud is to be derived
from case law. Columbus Skyline Securities at 498. Fraud is “a knowing
misrepresentation of the truth * * * to induce another to act for his or her detriment.”
Curran v. Vincent, 175 Ohio App.3d 146, 2007-Ohio-3680, 885 N.E.2d 964, ¶ 18 (1st
Dist.) The elements of civil fraud are (1) a misrepresentation, (2) material to the
transaction, (3) made falsely, knowingly, or recklessly, (4) with the intention of
misleading another into a justifiable reliance on those facts, (5) that causes the other
party injury. Burr v. Bd. of Cty. Commrs. of Stark Cty., 23 Ohio St.3d 69, 491
N.E.2d 1101 (1986), paragraph two of the syllabus; Curran at ¶ 18.
{¶42} Fifth Third sustained its initial burden to show that it did not commit
fraud. It specifically warned LaWarre and Papa of the inherent risks of options
trading. LaWarre and Papa failed to meet their reciprocal burden to show that they
justifiably relied on any misrepresentation by Fifth Third or that any
misrepresentation by Fifth Third caused them injury. The bottom line is that both of
them earned money on their investments while Hughes was at Fifth Third. It was
not until after he left to join another firm that LaWarre and Papa sustained financial
losses.
{¶43} As to a claim of fraudulent nondisclosure, the rule in Herbert applies.
Once Hughes had left Fifth Third and LaWarre and Papa were no longer its clients, it
no longer had a duty to disclose. See Blon v. Bank One, Akron, N.A., 35 Ohio St.3d
98, 101, 519 N.E.2d 363 (1988); Gator Dev. Corp. v. VHH, Ltd., 1st Dist. No. C-
080193, 2009-Ohio-1802, ¶ 28; Herbert, 93 Ohio App.3d at 277-278, 638 N.E.2d
161.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶44} Before Hughes left Fifth Third, a fiduciary relationship existed and
Fifth Third had a duty to disclose. See Blon at 101; Gator Dev. Corp. at ¶ 28. We
have already held that Fifth Third did not violate that duty to disclose. But even if it
had, the record does not show that LaWarre or Papa changed their position in
reliance on any omission, or that they suffered any resulting injury from an omission,
both necessary elements of a fraudulent-nondisclosure claim. Gator Dev. Corp. at ¶
28-29.
{¶45} Kentucky law is similar to Ohio law in that violations of its Blue Sky
Law require a showing of a material misrepresentation or omission, and economic
loss caused by the omission or misrepresentation. See Brown v. Earthboard Sports
USA, 481 F.3d 901, 916-917 (6th Cir.2007); Republic Bank & Trust Co. v. Bear,
Stearns & Co., Inc., 707 F.Supp. 702, 714 (W.Dist.Ky.2010). Moreover, the
misrepresentation or omission must pertain to material information that the
defendant had a duty to disclose. Ashland Inc. v. Oppenheimer, 648 F.3d 461, 468
and 471 (6th Cir.2011). Therefore, we reach the same result on LaWarre’s and Papa’s
claims under Kentucky law.
{¶46} We find no issue of material fact. Construing the evidence most
strongly in Papa’s and LaWarre’s favor, we hold that reasonable minds could only
reach one conclusion—that Fifth Third did not act fraudulently, and, therefore, it did
not violate Ohio’s or Kentucky’s securities laws. Consequently Fifth Third was
entitled to judgment as a matter of law on LaWarre’s and Papa’s statutory claims,
and the trial court did not err in granting Fifth Third’s motions for summary
judgment as to those claims. See Temple, 50 Ohio St.2d at 327, 364 N.E.2d 267;
Greene, 181 Ohio App.3d 253, 2009-Ohio-741, 908 N.E.2d 975, at ¶ 23; Stinespring,
107 Ohio App.3d at 215, 711 N.E.2d 1104.
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V. Claims against Fifth Third related to Collins’s Conduct
{¶47} LaWarre separately alleged claims for breach of an oral contract,
breach of fiduciary duty, negligence, and promissory estoppel against Fifth Third
related to the conduct of Fifth Third’s employee Kathy Collins. LaWarre claimed that
after Hughes had left Fifth Third and he had followed Hughes to the new firm, he
had asked Collins to review his financial statements from Hughes when LaWarre was
in California on business. The undisputed evidence showed that Collins only
confirmed the account balances on the statements. Collins acknowledged that she
did not understand options trading or the specifics of the items reported in the
statements.
{¶48} Collins had been LaWarre’s personal banker. When he took his
investment accounts to FHJ, Fifth Third remained his bank, but it no longer gave
him investment advice. At that point, the relationship between Collins and LaWarre
was that of banker and customer. It was not a fiduciary relationship and Collins
owed him no fiduciary duty. See Groob, 108 Ohio St.3d 348, 2006-Ohio-1189, 843
N.E.2d 1170 at ¶ 16-26; Five Star Fin. Corp. v. Merchant’s Bank & Trust Co., 192
Ohio App.3d 544, 2011-Ohio-314, 949 N.E.2d 1016, ¶ 30-31 (1st Dist.). Therefore,
LaWarre’s claim for breach of fiduciary duty fails as a matter of law.
{¶49} As to LaWarre’s claim for breach of an oral contract, a meeting of the
minds is an essential prerequisite to the enforcement of an oral contract. Kostelnik
v. Helper, 96 Ohio St.3d 1, 2002-Ohio-2985, 770 N.E.2d 58, ¶ 16; Blair v.
McDonagh, 171 Ohio App.3d 262, 2008-Ohio-3698, 894 N.E.2d 377, ¶ 55 (1st Dist.).
The terms of a contract may be determined from the “words, deeds, acts, and silence
of the parties.” Blair at ¶ 55, quoting Kostelnik at ¶ 15. LaWarre acknowledged that
he did not rely on Collins to review the entire statement or to understand and advise
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OHIO FIRST DISTRICT COURT OF APPEALS
him regarding his investments. During the time he was in California, he talked with
Hughes on a daily basis about his investments.
{¶50} Where the facts are undisputed and the only question to be resolved is
whether a breach of contract occurred, a question of law exists for the court to
decide. Id.; Blake Homes, Ltd. v. FirstEnergy Corp., 173 Ohio App.3d 230, 2007-
Ohio-4606, 877 N.E.2d 1041, ¶ 77 (6th Dist.). The undisputed facts in the record
show that the scope of the agreement was that Collins would inform LaWarre of the
account balances and nothing more. She fulfilled her obligations under the contract,
and, therefore, no breach of that contract occurred. See Stephen Bus. Ent. v. Lamar
Outdoor Advertising Co., 1st Dist. No. C-070373, 2008-Ohio-954, ¶ 16.
{¶51} LaWarre has also raised a negligence claim against Fifth Third related
to Collins’s conduct in which he contended that she was negligent in failing to
diligently review the statements and in failing to report their contents to him. But
this argument centers upon her agreement to review the documents. Therefore, any
negligence claim is barred by the economic-loss doctrine.
{¶52} The economic-loss doctrine prevents recovery of damages in tort for
purely economic loss. Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 106 Ohio
St.3d 412, 2005-Ohio-5409, 835 N.E.2d 701, ¶ 6; Eysoldt v. Proscan Imaging, Inc.,
194 Ohio App.3d 630, 2011-Ohio-2359, 957 N.E.2d 780, ¶ 19 (1st Dist.). “Tort law is
not designed * * * to compensate parties for losses suffered as a result of a breach of
duties assumed only by agreement.” Corporex Dev. at ¶ 6, quoting Floor Craft Floor
Covering, Inc. v. Parma Comm. Gen. Hosp. Assn., 54 Ohio St.3d 1, 7, 560 N.E.2d
206 (1990).
{¶53} Further, even if Collins, as Fifth Third’s employee, had owed LaWarre
a duty, it was only to inform him of the account balances. Therefore, no breach of
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OHIO FIRST DISTRICT COURT OF APPEALS
that duty occurred, and LaWarre’s negligence claim against Fifth Third related to
Collins’s conduct fails as a matter of law. See Menifee, 15 Ohio St.3d at 76, 472
N.E.2d 707; Hill, 36 Ohio St.3d at 39-40, 521 N.E.2d 780; Herbert, 93 Ohio App.3d
at 276-277, 638 N.E.2d 161.
{¶54} Finally, LaWarre raised a promissory-estoppel claim against Fifth
Third based on Collins’s conduct. The elements of promissory estoppel are (1) a
clear, unambiguous promise; (2) reliance upon the promise by the person to whom
the promise is made; (3) the reliance is reasonable and foreseeable; and (4) the
person claiming reliance is injured as a result of the reliance on the promise. Weiper
v. W.A. Hill & Assoc., Inc., 104 Ohio App.3d 250, 260, 661 N.E.2d 796 (1st
Dist.1995). “While the making, keeping and relying upon of alleged promises are
factual issues, typically for the jury, a court may deem certain circumstances
objectively unreasonable, as when it finds that ‘reasonable minds could come to but
one conclusion.’ ” Interstate Gas Supply, Inc. v. Calex Corp., 10th Dist. No. 04AP-
980, 2006-Ohio-638, ¶ 105, quoting Telxon Corp. v. Smart Media of Delaware, Inc.,
9th Dist. Nos. 22098 and 22099, 2005-Ohio-4931, ¶ 59.
{¶55} In this case, LaWarre simply did not rely on Collins to do anything
other than provide him with the balances on the statements. Again, he stated that he
did not rely on Collins to review the entire document or to understand and advise
him about his investments. In fact, he talked with Hughes on a daily basis about his
investments. Further, any reliance on her review of the statements would not have
been reasonable given her admission that she did not understand options trading or
the specifics of the statements. See Heinz & Assoc., Inc. v Diamond Cellar Holdings,
LLC, 10th Dist. No. 11AP-688, 2012-Ohio-1422, ¶ 21. Therefore, no material issues
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OHIO FIRST DISTRICT COURT OF APPEALS
of fact exist for trial, and the trial court did not err in granting summary judgment in
favor of Fifth Third on LaWarre’s separate claims regarding Collins’s conduct.
VI. Summary
{¶56} In sum, we hold that the trial court did not err in granting summary
judgment in favor of Fifth Third on all of LaWarre’s and Papa’s claims. We overrule
the assignments of error and affirm the trial court’s judgment in all respects.
Judgment affirmed.
SUNDERMANN, P.J., concurs.
CUNNINGHAM, J., concurs in part and dissents in part.
CUNNINGHAM, J., concurring in part and dissenting in part.
{¶57} I concur in the majority’s decision to the extent that it affirms
summary judgment for Fifth Third Securities and Fifth Third Bank on LaWarre’s
separate negligence claim based on Kathy Collins’s conduct with respect to his
Fidelity investment account statements. That claim is barred by the economic loss
doctrine. But, for the reasons that follow, I dissent from the majority’s decision
affirming summary judgment on the other claims.
{¶58} At the summary judgment stage of the proceedings, we must view the
evidence in the light most favorable to the nonmovants, here William LaWarre and
John Papa. Accordingly, I have summarized the salient facts, as supported by the
record.
I. Background Facts
{¶59} In late 2004, LaWarre was introduced by Collins, a private banker in
Fifth Third’s Investment Advisor Group, to Dan Hughes, an investment advisor and
registered representative in the same group. In 2006, Jana Sturgeon, another
private banker in the same group, introduced Papa to Hughes. All of these
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OHIO FIRST DISTRICT COURT OF APPEALS
Investment Advisor Group employees were dually employed by Fifth Third Bank and
Fifth Third Securities. They also shared a supervisor, Steve Brown, and the branch
office in Northern Kentucky.
{¶60} Collins had been LaWarre’s private banker for over 20 years.
Sturgeon had been Papa’s employee for many years before becoming his private
banker.
{¶61} LaWarre and Papa subsequently opened investment accounts at Fifth
Third Securities with Hughes as their investment advisor. Evidence in the record
indicates that Collins and Sturgeon were eligible for compensation for successful
referrals to Fifth Third Securities that varied according to the size and profitability of
the referral.
{¶62} Although the options contract that LaWarre and Papa had signed
generally disclosed the high risks of options trading, LaWarre and Papa asserted that
they had proceeded with Hughes’s specific options trading strategy based on
representations from the Investment Advisor Group employees that the strategy was
a “low-risk” investment course that did not expose significant investment principal to
loss.
{¶63} According to Papa, Hughes had specifically told him that he had
researched the fluctuation of the Standard & Poor’s 500 index (“S & P”) for the past
40 years, 35 more than Fifth Third required, and that based on this research, his
“trades” would have failed only six times in those 40 years.
{¶64} LaWarre and Papa claimed they told Hughes that their principal had
to be protected. Papa specified that no more than five percent of his principal could
be at risk. Hughes allegedly told both Papa and LaWarre that if the “trades” failed in
a particular month, the trades could be rolled over to the next month. As a result, in
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OHIO FIRST DISTRICT COURT OF APPEALS
the worst case, they would get their principal back but would not make the one-to-
three percent “interest” for two months.
{¶65} LaWarre and Papa both claimed that they had not read the options
contract or filled in any of the requisite information before signing it because of their
trust in the Investment Advisor Group employees, particularly their private bankers,
and the rushed way that the contracts had been presented to them. They claimed
these employees had provided the necessary information on the forms, including
their acceptable risk levels.
{¶66} Allegedly at the recommendation of the Investment Advisor Group
employees, Papa funded the investment strategy with a home-equity line from Fifth
Third Bank, and LaWarre used Hughes’s options strategy to fund the purchase and
renovation of homes with multimillion dollar loans from Fifth Third Bank.
According to LaWarre, Hughes promised that the strategy would provide sufficient
monthly cash flow for him to repay his loans to Fifth Third Bank. These loans
included a $3.7 million mortgage, obtained in December 2004, to purchase property
in Montecito, California; a $1 million line-of-credit for improvements, suggested by
Collins; a $7 million residential mortgage, obtained in February 2006, to purchase
another property in California; and a $4.25 million line of credit that Fifth Third
Bank renewed in February 2007. The bank knew that LaWarre was relying on
income from Hughes’s strategy to stay current on these loans.
{¶67} While employed by Fifth Third Securities, Hughes allegedly exercised
discretionary control over Papa’s and LaWarre’s investment accounts. Both Papa
and LaWarre averred that Hughes executed transactions in their accounts without
first obtaining their approval.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶68} Hughes was immediately supervised by Stephen Brown and Steve
Sherline, but these supervisors testified at their depositions that they did not
understand the options strategy employed by Hughes. They also testified that one
factor concerning the suitability of an investment is the source of the investment
funds. But neither knew that Papa was funding the strategy with hundreds of
thousands of dollars of liquified home equity.
{¶69} In the fall of 2006, Hughes was placed on heightened supervision
while employed by Fifth Third, in part because the timing of his trades raised
concerns. Sherline was aware that Hughes had also been placed on heightened
supervision with Fifth Third Securities in 2003. According to Hughes, Fifth Third
imposed the heightened supervision in 2006 due to Fifth Third’s concern over the
use of the options strategy. Sherline had weekly discussions with Hughes about the
risks associated with the strategy and felt that Hughes did not have a method to
avoid losses during periods of market volatility.
{¶70} Sherline testified at his deposition that he would personally discuss
with clients large losses under the protocol of Fifth Third Securities. However, at
about the time that Hughes was removed from heightened supervision in the spring
of 2007, LaWarre lost over one million dollars in his options trading account, and
Sherline did not discuss the loss with him.
{¶71} At least some evidence indicates that when Fifth Third Securities
finally appreciated the enormous risks presented by the options strategy Hughes
employed—the financial equivalent of “picking up pennies in front of a
steamroller”—it gave Hughes the choice to abandon the strategy or leave his job.
Hughes chose to leave.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶72} At Hughes’s exit interview, Sherline told Hughes that his options
strategy would one day cause huge losses of clients’ funds. Additionally, he told
Hughes that his strategy required the multiple layers of supervision provided by Fifth
Third Securities but that Hughes would not receive at his new firm.
{¶73} Neither Fifth Third Securities nor Fifth Third Bank disclosed to Papa
or LaWarre any of this information, including the existence and circumstances of the
heightened supervision or the reason why their employment relationship with
Hughes was severed.
{¶74} LaWarre and Papa followed Hughes to his new investment advisory
firm, where their investments were held in security accounts with Fidelity Brokerage
Services (“Fidelity”). Papa claimed that Sturgeon encouraged him to follow Hughes
because she considered Hughes to be “the best.”
{¶75} Shortly after LaWarre and Papa moved their investment accounts
from Fifth Third Securities, Steve Seidl, an investment advisor at Fifth Third
Securities, contacted them and attempted to bring them back. Seidl testified at his
deposition that he had offered to execute, with Sherline’s approval, the same options
strategy employed by Hughes, even though he did not like the stress of executing the
strategy and Sherline had told him that he believed it was only a matter of when, not
if, the strategy would fail.
{¶76} Seidl also offered alternative investment strategies that provided less
of a return, but less stress, because he believed that Hughes’s “strategy was no better
than any other out there, that over time the returns were going to regress to the
mean.” He claimed he told LaWarre and Papa that Hughes’s strategy “may be high
flying now but when the volatility returns to the market you’re going to be looking at
returns that are similar to that of the S & P 500.” He also claimed to have told them
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OHIO FIRST DISTRICT COURT OF APPEALS
that it was only a matter of time before it would fail, but he did not explain to either
the extreme loss of principal that was likely to result.
{¶77} LaWarre claimed that Seidl had been careful not to undermine the
value of Hughes’s strategy, but that Seidl did offer other investment options. These
other investment options, however, were insufficient to provide LaWarre with the
$125,000 to $150,000 monthly income that both Fifth Third Bank and Fifth Third
Securities knew LaWarre needed to pay down the lines of credit and loans.
{¶78} After this communication from Seidl in September 2007, Fifth Third
Securities and Fifth Third Bank did not give or offer to give investment advice to
LaWarre or Papa.
{¶79} Although LaWarre and Papa did not incur a net loss in their options
trading accounts over the period that they had invested with Hughes at Fifth Third
Securities, they both eventually incurred significant net losses in their Fidelity
options trading accounts when the market turned volatile.
{¶80} Papa’s first large loss after transferring his investment accounts from
Fifth Third Securities occurred in January 2008, about four months later, when he
lost over 50 percent of the value in one of his option accounts. The account value
dropped from $1.2 million to $440,000. This loss was far more than the five percent
loss of principal that Papa had authorized Hughes to expose him to.
{¶81} Papa did not discover the loss, however, until late 2008, when he first
read his January 2008 statement. Papa claimed that he did not typically read his
statements because he had been repeatedly told by both Hughes and Sturgeon that
his loss of principal was capped at five percent. When Papa questioned Hughes
about the loss, Hughes told him that he was reading his statement incorrectly and
that over $2 million remained in his account.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶82} In January 2009, Papa asked Hughes to transfer money to pay off his
$1.3 million mortgage. Hughes told him that his account had dwindled to $180,000.
At that point, Papa closed his accounts with Hughes.
{¶83} LaWarre’s first large loss after transferring his investment account
from Fifth Third Securities also occurred in January 2008. Collins, who was
monitoring the on-going market value of LaWarre’s Fidelity options account for Fifth
Third Bank, discussed the loss of over $5 million with LaWarre because the value of
the account impacted LaWarre’s ability to repay on his obligations to Fifth Third
Bank.
{¶84} LaWarre told her that he had spoken to Hughes about the loss and
that Hughes had reassured him that the options strategy would still work and that he
would confine LaWarre’s loss to a lower amount. According to LaWarre, the amount
of loss was confined to $500,000 per month, and he told Collins this. Collins’s notes
indicate that she had relayed this information to the credit review division of the
bank. LaWarre again felt that he could not back out of the strategy at that point
because he needed the income flow to pay back his Fifth Third Bank obligations.
{¶85} At least by April 2008, LaWarre arranged for Collins to receive his
Fidelity statements directly from Hughes. LaWarre claimed that Collins had agreed
to “review” his account statements and “confirm the account balances” to him over
the telephone because he was out of town and not receiving the statements himself.
{¶86} In May 2008, LaWarre began to suffer more losses, and Hughes
concealed them on LaWarre’s Fidelity account statements. Hughes’s modification of
some of the figures left internal inconsistencies within the account statement. For
example, in the May 2008 statement, Hughes listed the core account holdings as
$3,052,508 on page three, but as $4,198,446 on page four. Collins received
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OHIO FIRST DISTRICT COURT OF APPEALS
LaWarre’s modified May 2008 statement from Hughes in early July 2008, and she
continued to receive LaWarre’s statements from Hughes until October 2008. After
which time, she received LaWarre’s investment statements from Metro Cities
Mortgage.
{¶87} Collins claimed that she never noticed the fraud on the statements
and that she merely checked the ending “net-market value account balance” on the
first page of the statements. Although she conceded that she had conversations with
LaWarre in which she discussed the balances on the monthly statements, she never
acknowledged an express agreement with LaWarre to review the statements or to
report the ending balance.
{¶88} During this time, LaWarre was communicating regularly with
Hughes, who continued to falsify the account statements. Eventually, in March
2009, Hughes confessed to LaWarre that his account had almost no assets.
{¶89} LaWarre and Papa both presented evidence that they would not have
continued to allow Hughes to employ his options strategy after he left Fifth Third
had they known the true risks involved.
II. Expert-Witness Opinion
{¶90} In opposition to the motion for summary judgment, LaWarre and
Papa presented evidence from several expert witnesses. Steve Stern opined that
Collins’s review of LaWarre’s Fidelity statements was “negligent, insufficient, not
reasonably diligent and did not meet industry standards” to monitor a borrower’s
liquidity or to report on the account’s portfolio balance. He arrived at this
conclusion because she reviewed only the front page and did not reconcile the
summary total on the front page with the supporting page subtotals.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶91} According to Stern, had Collins performed a reasonably diligent
review, she would have immediately discovered the fraud and, under industry
standards, she would have been required to report it to the relevant business and
government authorities.
{¶92} Stern also opined that Collins’s and Sturgeon’s receipt of “incentive
compensation” for referring LaWarre and Papa to Hughes violated an FDIC
regulation, was unethical, and created a conflict of interest that should have been
disclosed to LaWarre and Papa.
{¶93} Sean P. Kelly performed a “cash flow analysis” of LaWarre’s Fidelity
investment account and opined that the account suffered a net loss of $6,463,900.90
from its inception in September 2007 through March 2009. He also composed a
profit and loss summary for each individual security, including options, but he did
not provide a cumulative net profit/loss figure for the option trades. Kelly did not
factor in any gains from options trading at Fifth Third, compare the figures with
general market conditions, or separate out the profit-loss analysis for the different
investments in the account, which included options, bonds and security trading.
{¶94} Kelly performed the same analysis for all of Papa’s Fidelity accounts.
According to his report, Papa’s combined accounts suffered a net loss of
$2,114,869.901 from October 2007 through December 2008.
{¶95} LaWarre and Papa also presented the expert opinion of Gerald
Kuschuk, who concluded, after considering all the circumstances of the options
trading, including that Papa had invested home equity in options trading and
LaWarre had used the options strategy to generate income to pay a mortgage loan,
1 In Papa’s pretrial statement, he requested compensatory damages of $1,700,000. It is not clear
how he derived this figure.
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OHIO FIRST DISTRICT COURT OF APPEALS
that the options strategy Hughes used in LaWarre’s and Papa’s accounts while he
was employed by Fifth Third Securities and after was “unsuitable.” Kuschuk’s report
provides in part as follows:
I have reviewed the Fifth Third Securities and
Fidelity Investment account statements of the
Plaintiffs. All of these accounts essentially used the
same options strategy, first at Fifth Third and later at
Fidelity. At both brokerage firms, the clients
established short term options spreads on either the
S & P or the Nasdaq Index with average durations of a
month or less. They were usually done where the short
option (put or call or sometimes both) was
approximately 5% “out of the money.” That means
that the underlying index would have to move 5%
before the short option would have intrinsic value and
become “in the money.” In order to reduce the margin
requirements of these short options, an equal number
of options were typically purchased on the same index
with the same expiration month and with an exercise
price usually 25 points away from the short option.
The result is what is known as a spread position with a
25 point differential.
***
Sometimes both put and call spreads were established
where a profit would be earned as long as the index
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OHIO FIRST DISTRICT COURT OF APPEALS
traded within a fixed range during the life of the
options.
{¶96} Kuschuk provided examples from several actual transactions to
demonstrate that on a monthly basis Hughes had employed option spread
transactions with high-risk-to-reward ratios and high leverage in the plaintiffs’
accounts with Fifth Third and Fidelity.
{¶97} To that end, on March 21, 2006, a day when the S & P fluctuated
between 1296 and 1310, the following transaction took place in Papa’s Eagle Flight
Fifth Third Securities account: bought “100 puts S & P 500 April 1220 at 1.58 each
for $15,800 total”; sold “100 puts S & P 500 April 1245 at 2.47 each for $24,685
total;” resulting in “a net credit of $8,885” ($24,685-$15,800).
{¶98} This transaction resulted in a “credit” of .89 points (2.47-158), while
the “spread differential” was 25 points. The “profit potential” was less than one point
while the risk potential was over 24 points. Therefore, if the S & P at expiration on
April 21, 2006, was over 1245, Eagle Flight would make a profit of $8,886 because all
of the options would expire “out of the money.” But the maximum risk exposure of
the trade was the 25-point spread differential less the initial credit—$2500
multiplied by 100, less $8,885, which equals $241,115—for a risk-to-reward ratio of
27 to 1.
{¶99} The maximum loss of $241,115 would have been incurred if the S & P
had dropped below 1220, or 6.5 percent from where it was when the position was
initiated. Because Eagle Flight’s account equity at the time was $356,000, a 6.5
percent drop in the S & P would have resulted in a 67 percent loss of equity.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶100} Kuschuk found that the “pattern of selling out of the money put
and/or call spreads for relatively small credits versus the potential risk prevailed
throughout Plaintiffs’ accounts with Fifth Third and Fidelity.” He concluded that
[w]hile this strategy tends to result in relatively small
gains during periods of low to moderate volatility, the
potential risks are enormous should the market
become more volatile. With risk reward ratios of 10 to
over 25 to 1, the high leverage employed, and the
relatively large positions taken, an investor could
potentially lose all prior gains plus a significant
portion of his investment principal, if the underlying
index became volatile and moved against only one or
two option spread positions.
{¶101} He opined that the
options strategy employed in the Plaintiffs’ accounts at
Fifth Third and Fidelity amounted to nothing more
than highly leveraged, extreme speculation that was
not suitable for any investor due to the relatively large
positions, disproportionate risk/reward ratios, large
proportion of investment principal at risk, and
extreme leveraging employed. If options spread
transactions are to be employed, the size of the
positions should be modest compared to the size of the
accounts due to the large potential risk. It is my
understanding that some of the accounts invested
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OHIO FIRST DISTRICT COURT OF APPEALS
home equity in the above described option strategy or
used the strategy to generate income to pay a mortgage
loan. That only exacerbated the unsuitability of the
options strategy employed in those accounts. It would
be entirely flawed to believe that the option strategy
employed * * * could result in a reliable source of
income.
{¶102} Kuschuk also opined that four documents describing the options
strategy that Hughes had created for clients while employed by Fifth Third were
“misleading in many ways.”
III. Claims Against Fifth Third Securities
{¶103} Unlike the majority, I would address separately the claims against
Fifth Third Bank and Fifth Third Securities. I begin with the claims against Fifth
Third Securities. The plaintiffs filed an amended complaint alleging that Fifth Third
Securities: (1) is liable for the breach of various fiduciary duties; (2) is liable under a
contract theory for recommending an “unsuitable investment;” (3) is liable for
negligent misrepresentation for representing Hughes’s options strategy as a “low-
risk suitable strategy”; (4) is liable for the negligent supervision of its employees,
including Hughes, Collins, and Sturgeon; (5) is liable for violations of the Kentucky
Securities Act; and (6) is liable for fraud for the misrepresentation and concealment
of facts. Additionally, LaWarre presented separate claims alleging that Fifth Third
Securities (1) is liable to him for violations of the Ohio Securities Act and (2) is liable
to him for Collins’s conduct in reporting his monthly portfolio balances under the
theories of breach of fiduciary duty, breach of contract, negligence, and promissory
estoppel.
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OHIO FIRST DISTRICT COURT OF APPEALS
IV. Breach-of-Fiduciary-Duty Claims - Based on Conduct of Fifth Third
Securities and Its Employees While Hughes was Employed by Fifth Third.
{¶104} In Ohio, a claim of breach of a fiduciary duty is essentially a claim of
negligence that involves a higher standard of care. Strock v. Pressnell, 38 Ohio St.3d
207, 216, 527 N.E.2d 1235 (1988). Thus, to recover on this claim, a plaintiff must
prove a breach of a fiduciary duty owed and an injury proximately caused by that
breach. Id.{¶105} In moving for summary judgment on this claim, Fifth Third Securities
first focused on the timing of LaWarre’s and Papa’s losses that they claim as
damages. It argued that at the time of the losses, it had no duty to control the
harmful conduct of its former employee, Hughes, and it owed no fiduciary duty to
LaWarre and Papa, who were no longer receiving investment advice from Fifth Third
Securities.
{¶106} LaWarre and Papa countered in part that this breach of fiduciary duty
claim was based on the breach of the duties that Fifth Third Securities owed to
LaWarre and Papa while they invested with Fifth Third Securities and its agent at
that time, Hughes.
{¶107} The Third District Court of Appeals has explained the scope of
fiduciary duties owed by a broker to a client in providing financial advice:
In general, the duties of a broker associated with a
non-discretionary account * * * include: the duty to
recommend a stock only after studying it sufficiently to
become informed as to its nature, price, and financial
prognosis; the duty to inform the customer of the risks
involved in purchasing or selling a particular security;
the duty not to misrepresent any fact material to the
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OHIO FIRST DISTRICT COURT OF APPEALS
transaction; and the duty to transact business only
after receiving prior authorization from the customer.
Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
(E.D.Mich.1978), 461 F. Supp. 951, 953, aff’d (6th
Cir.1981), 647 F.2d 165. On the other hand,
brokers who handle discretionary accounts
become a fiduciary in the broad sense and have
increased duties to keep customers informed
regarding the changes in the market which
affect the customer's interest and to explain
the practical impact and potential risks of the
course of dealing in which the broker is
engaged. Id. (Emphasis added.)
Burns v. Prudential Sec., Inc., 167 Ohio App.3d 809, 2006-Ohio-3550, 857 N.E.2d
621 (3rd Dist.).
{¶108} On the evidenced submitted in opposition to the motion for summary
judgment, I agree with the majority that the plaintiffs presented sufficient evidence
that Fifth Third Securities owed LaWarre and Papa a fiduciary duty while Hughes
was in its employ. Not only did Fifth Third Securities provide investment advice to
LaWarre and Papa, but the evidence suggests that Hughes exercised discretionary
control over their accounts. Thus, there was evidence that Hughes, and, therefore,
his employer, became fiduciaries with heightened duties.
{¶109} Further, there is evidence that Fifth Third Securities and its agent
Hughes breached these fiduciary duties, including the duty to recommend only
suitable investments and the duty to disclose information that is adverse to the
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OHIO FIRST DISTRICT COURT OF APPEALS
interest of its principal. For example, Kuschuk opined that the options strategy
Hughes used while employed by Fifth Third Securities was unsuitable for anyone,
including LaWarre and Papa, because of the size of the positions, the large risk
involved for small gains, the amount of principal at risk, and the extreme leveraging
employed. And there was evidence that Hughes’s supervisors did not initially know
enough about the strategy themselves to condone the use of it.
{¶110} Further, LaWarre and Papa presented evidence that Fifth Third
Securities did not sufficiently disclose to their clients the true risks involved in the
options strategy employed by Hughes. Thus, a genuine issue of material fact
remains as to whether Fifth Third Securities breached the fiduciary duties owed to
LaWarre and Papa.
{¶111} The critical issue in this case is whether a broker-dealer such as Fifth
Third Securities may be held responsible for investment losses that are caused by its
own misconduct, but that are not realized until after the client transfers his
brokerage account to another institution. This raises the issue of proximate cause.
{¶112} This court’s prior decision in Herbert v. Banc One Brokerage Corp.,
93 Ohio App.3d 271, 638 N.E.2d 161 (1st Dist.1994), did not reach the issue of
proximate cause. In Herbert, this court held that a bank and a securities brokerage
did not have a fiduciary duty to customers to warn them that their former employee
was selling them worthless securities after the broker had left the brokerage’s
employ. Id. at 278. When the former employee sold the worthless securities, and
thus breached his fiduciary duty to his customers, he was no longer an agent of the
bank and brokerage, and the bank and brokerage were no longer providing
investment advice to the customers.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶113} The Herbert court did not address whether the bank and brokerage
had breached a fiduciary duty to the customers while the former employee was still
employed by the bank and brokerage, as those claims were barred by the statute of
limitations. See id. at 273-274. Thus, Herbert did not involve what a plaintiff must
demonstrate to establish that a bank’s and a brokerage’s breach of fiduciary duties
proximately caused losses that occurred after the employee left the employ.
Therefore, I believe the majority’s reliance on Herbert in resolving the issue of
causation is erroneous.
{¶114} The concept of proximate cause limits an actor’s liability for the
consequences of his conduct. “As a practical matter, legal responsibility must be
limited to those causes which are so closely connected with the end result and of such
a significance that the law is justified in imposing liability.” Keeton, Dobbs, Keeton &
Owen, Prosser and Keeton on the Law of Torts Section 41, 264 (5th Ed.1984), cited
in Black’s Law Dictionary, at 234 (8th Ed.2004).
{¶115} Fifth Third Securities also claimed that LaWarre’s and Papa’s losses
were caused by their own conduct, Hughes’s misconduct, and the shift in volatility in
the market in general.
{¶116} But Kuschuk opined that the strategy Hughes employed when
LaWarre and Papa suffered their net losses in their Fidelity accounts was the same
strategy that Hughes had used while employed at Fifth Third. And Papa and
LaWarre both testified that they stayed with the strategy because Fifth Third
employees had so strongly endorsed it and because they were dependent on the
strategy to continue to produce the necessary income flow to pay back their Fifth
Third loans, which the Investment Advisory Group employees had recommended.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶117} Assuming that the existence of intervening and superseding causes of
injury can be a defense to actions brought for the breach of a fiduciary duty, the Ohio
Supreme Court has acknowledged that the issue of intervening causation generally
presents factual issues to be decided by the trier of fact. Leibreich v. A.J.
Refrigeration, Inc., 67 Ohio St.3d 266, 269, 617 N.E.2d 1068 (1993). The issue is
whether the intervening act was “foreseeable” and, therefore, a consequence of the
original negligent act, or whether the intervening act is both “new and independent,”
and, thus, a superseding cause, which operates to absolve the original actor. Id.,citing Cascone v. Herb Kay Co., 6 Ohio St.3d 155, 160, 451 N.E.2d 815 (1983). An
intervening negligent act is “new” where it could not have been reasonably foreseen
and “independent” where there is no connection or relationship of cause and effect
between the original and subsequent acts of negligence. R.H. Macy & Co., Inc. v.
Otis Elevator Co., 51 Ohio St.3d 108, 111, 554 N.E.2d 1313 (1990), quoting 1 Ohio
Jury Instructions, Section 11.30 (1983), now OJI CV 405.05.
{¶118} Fifth Third Securities’s fiduciary duties ended in September 2007,
after LaWarre and Papa transferred their investment accounts to Fidelity and no
longer sought or received investment advice from Fifth Third Securities. But the
facts present a genuine issue of material fact on the issue of whether the alleged
breach of fiduciary duties by Fifth Third Securities before that time, if proved, is so
closely connected to LaWarre’s and Papa’s continued trust in Hughes and reliance on
the options strategy as used by Hughes, such that a reasonable person could find that
those breaches proximately caused the financial losses ultimately incurred,
notwithstanding any intervening causes, including LaWarre’s and Papa’s own
conduct and Hughes’s misconduct.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶119} Thus, the trial court erroneously granted summary judgment to Fifth
Third Securities on LaWarre’s and Papa’s breach-of-fiduciary-duty claims based on
alleged breaches that occurred when LaWarre and Papa were receiving investment
advice from Fifth Third Securities.
V. Breach-of-the-Account-Agreement Claim
{¶120} The Options Account Agreement that LaWarre and Papa signed
provides in part that “Your Broker/Dealer is responsible for * * * (4) determining the
suitability of investment recommendations and advice, (5) operating and supervising
your brokerage account and its own activities in compliance with applicable laws and
regulations * * *.” The agreement, which is governed by Massachusetts law, thus
incorporates various laws and regulations by the governing organizations, including
the Financial Industry Regulatory Authority (“FINRA”).2 These laws and regulations
required Fifth Third Securities (1) to diligently supervise all accounts and registered
representatives, (2) to deal fairly with all customers, and (3) to recommend only
suitable investments, among other duties.
{¶121} Fifth Third Securities maintains that summary judgment was
appropriate on the breach-of-the-account-agreement claim because of Herbert’s no
duty rule and because LaWarre and Papa failed to establish a causal connection
between their investment losses in 2008-2009 and Fifth Third Securities’s pre-
September 2007 conduct. According to Fifth Third Securities, the causal connection
was broken when LaWarre and Papa (1) voluntarily transferred their investment
accounts; (2) executed new options trading agreements and written disclosure forms
2 The options account agreement also contained an arbitration clause for the resolution of
disputes. LaWarre’s and Papa’s claims against Fifth Third Securities were originally presented for
arbitration. After Fifth Third Securities waived its right to arbitrate, the plaintiffs added Fifth
Third Securities as a defendant in this case.
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OHIO FIRST DISTRICT COURT OF APPEALS
with a new firm and new compliance regime; and (3) made investment decisions
with Hughes and his new investment firm, without consulting Fifth Third Securities.
But it should not prevail on these arguments.
{¶122} As a preliminary matter, Herbert involves tort duties under Ohio law
and does not govern a breach-of-contract claim governed by Massachusetts law.
Under Massachusetts law, damages recoverable for a breach of contract are limited
to those that (1) are the “natural and proximate result” of the breach and (2) are
“such as reasonably might have been expected to be within the contemplation of the
parties when the contract was entered into as the probable result of a breach of it.”
Wheelock v. Postal Tel. Cable Co., 197 Mass. 122, 126, 83 N.E. 313 (1908). Fifth
Third Securities moved for summary judgment only on the first issue, proximate
cause.
{¶123} Here LaWarre and Papa presented evidence that Fifth Third
Securities had breached the options contract by designing and implementing an
unsuitable investment strategy that involved not just highly-risky, highly-leveraged,
and large-position options trading, but the use of liquidated home equity, in Papa’s
case, and the promise of sufficient income from the options trading to pay a
mortgage loan, in LaWarre’s case. Thus, the strategy encompassed more than just
the monthly options trades.
{¶124} The alleged breaches by Fifth Third Securities also include the failure
to supervise its employees and adequately disclose risks to its clients. And LaWarre
and Papa presented evidence that because of these breaches, they were compelled to
continue with the strategy even after they transferred their accounts from Fifth Third
Securities, and they subsequently suffered great financial loss. Therefore, the record
contains sufficient evidence of proximate cause to demonstrate the existence of a
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OHIO FIRST DISTRICT COURT OF APPEALS
genuine issue of material fact and defeat Fifth Third Securities’s motion for summary
judgment on this claim.
VI. Fraud and Negligent-Misrepresentation Claims
{¶125} An action for fraud requires proof of a false material representation,
or a similar concealment where there is a duty to disclose; an intent of misleading
another into relying upon the representation or omission; and damages proximately
caused by the reliance. See Burr v. Bd. of Commrs., 23 Ohio St.3d 69, 491 N.E.2d
1101 (1986), paragraph two of the syllabus, limited on other grounds by the Political
Subdivision Tort Liability Act.
{¶126} LaWarre’s and Papa’s negligent-misrepresentation claim was based
on 3 Restatement of the Law 2d, Torts, Section 522 (1965), which the Ohio Supreme
Court adopted in a claim against an accounting firm. Haddon View Invest. Co. v.
Coopers & Lybrand, 70 Ohio St.2d 154, 214, 436 N.E.2d 212 (1982). That section
provides the following:
One who, in the course of his business,
profession, or employment, or in any other transaction
in which he has a pecuniary interest, supplies false
information for the guidance of others in their business
transactions, is subject to liability for pecuniary loss
caused to them by their justifiable reliance upon the
information, if he fails to exercise reasonable care or
competence in obtaining or communicating the
information.
3 Restatement of the Law 2d, Torts, Section 522 (1965).
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶127} Important to both of these claims is that a party to a business
transaction in a fiduciary relationship with another is required to make full
disclosure of material facts known to him but not the other, and to dispel misleading
impressions that are or might have been created by partial revelation of the facts.
See Blon v. Bank One, 35 Ohio St.3d 98, 101, 519 N.E.2d 363 (1988).
{¶128} Fifth Third Securities moved for summary judgment on the ground
that LaWarre and Papa could not demonstrate a misrepresentation, because (1) the
options contract set forth a sufficient warning concerning the risks, (2) it did not fire
Hughes, and (3) it never determined that the options strategy was unsuitable, as
demonstrated by its continued allowance of options trading by its employees even
after Hughes left.
{¶129} But the evidence presented in opposition demonstrated that Fifth
Third Securities employees had represented to LaWarre and Papa that the options
strategy, as implemented for them, was a “low-risk investment,” that Fifth Third
Securities knew before Hughes left and took LaWarre’s and Papa’s investments with
him that the investment strategy was the “equivalent of picking up pennies in front of
a steam roller,” and that Fifth Third Securities did not disclose to their fiduciaries the
unsuitability of the investments or the heightened supervision of Hughes and the
facts of his termination. This evidence presented a genuine issue of material of fact
on the misrepresentation elements of the fraud and negligent-misrepresentation
claims.
{¶130} Fifth Third Securities also moved for summary judgment on these
claims on the ground that the plaintiffs failed to present an issue of fact as to the
element of justifiable reliance. First, it argued that LaWarre’s and Papa’s admitted
failure to read the disclosure documents provided by Fifth Third Securities destroys
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OHIO FIRST DISTRICT COURT OF APPEALS
the justifiable reliance element. The plaintiffs signed a document with the following
general disclosure that did not reference the particular strategy actually employed:
[T]he purchase and writing of options contracts
involve a high degree of risk, and are not suitable for
many investors and, accordingly, should be entered into
only by investors who understand the nature and extent
of their rights and obligations and are fully aware of the
inherent risk involved, especially during extreme market
volatility or trading volumes.* * * [I] should not
purchase any option unless I am able to sustain a total
loss of the premium and transaction costs * * *.
(Emphasis added.)
{¶131} Generally, willful ignorance cannot be equated with reasonable
reliance. As the Ohio Supreme Court has stated, “A person of ordinary mind cannot
be heard to say that he was misled into signing a paper which was different from
what he intended, when he could have known the truth by merely looking at what he
signed.” McAdams v. McAdams, 80 Ohio St. 232, 240-241, 88 N.E. 542 (1909). But
here, as in McAdams, there is an allegation of a special relationship of trust and
confidence, which is supported by facts in the record, which alters the general rule of
willful ignorance.
{¶132} In McAdams, the plaintiff-father sought to reform a deed in which he
had granted land to his son, an attorney who advised him in making the deed. Id. at
236. The burden rested on the plaintiff-father to show by clear-and-convincing proof
that the deed was fraudulent, but only after the son at trial had rebutted the
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OHIO FIRST DISTRICT COURT OF APPEALS
“presumption” of undue influence that arose from the existence of a fiduciary
relationship. Id. at paragraphs one and two of the syllabus.
{¶133} Further, as LaWarre and Papa have emphasized, the general
disclaimer did not warn of massive loss of principal. See generally In re Prudential
Securities Inc. Ltd. Partnerships Litigation, 930 F.Supp. 68 (S.D.N.Y.1996) (holding
that genuine issue of material fact remained as to whether the defendant’s “carefully
masked general warnings” were inadequate “in the face of specific known risks which
border on certainties.”) Thus, under these circumstances, LaWarre’s and Papa’s
failure to read the options agreement is not the “death knell” of their claim of
justifiable reliance.
{¶134} LaWarre and Papa both stated in their deposition testimony that they
had relied on Fifth Third Securities’s representation that Hughes’s options strategy
as implemented for them was “low risk” and suitable, and the continued condoning
of the strategy and Hughes by Fifth Third Securities’s employees, in remaining with
the strategy and Hughes. The evidence also demonstrates that neither LaWarre nor
Papa understood the strategy.
{¶135} Further, because of the fiduciary relationship between the parties
during the representations, and because Fifth Third Securities failed to unequivocally
correct the misrepresentations, the facts, when construed in the light most favorable
to LaWarre and Papa, support a finding that this continued reliance was justifiable.
{¶136} Similarly meritless is Fifth Third Securities’s argument that LaWarre
and Papa could not establish justifiable reliance as a matter of law because they had
relied on representations from Hughes, and not Fifth Third Securities, when they
chose to invest with Hughes from September 2007 until 2009.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶137} LaWarre and Papa both presented evidence that they relied on Fifth
Third Securities’s prior representations in making the decision to continue investing
in the strategy that Hughes had implemented for them while he had been employed
by Fifth Third. And Papa presented evidence that Sturgeon had encouraged him to
transfer his Fifth Third Securities accounts and remain investing with Hughes.
Because of this evidence, the issue presented by the fact of Hughes’s subsequent
advice is one of causation, not justifiable reliance.
{¶138} And, as already discussed, the record contains sufficient facts on
proximate causation to defeat the motion for summary judgment on the tort claims.
Herbert does not address the liability of a financial institution under these
circumstances, where the loss does not occur until after the fiduciary relationship has
terminated, but the loss is allegedly caused by the earlier breach of those fiduciary
and common law duties. Therefore, the trial court’s grant of summary judgment to
Fifth Third Securities on the fraud and negligent-misrepresentation claims should be
reversed.
VII. Negligent-Supervision Claim
{¶139} Fifth Third Securities argued for summary judgment on LaWarre’s
and Papa’s negligent-supervision claim based on Herbert. But because LaWarre and
Papa presented some evidence of Fifth Third Securities’s failure to properly
supervise its employees, who breached their fiduciary duties to LaWarre and Papa,
and that this failure proximately caused their losses, even after the fiduciary
relationship ended, Herbert does not apply.
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OHIO FIRST DISTRICT COURT OF APPEALS
VIII. Economic-Loss Rule
{¶140} Fifth Third Securities argued that the economic-loss rule barred the
plaintiffs’ breach of fiduciary duty, negligent-misrepresentation, and negligent-
supervision claims because the dispute was the subject of an existing contract
between the parties.
{¶141} A party suffering only economic loss from the breach of an express or
implied contractual duty may not assert a tort claim for such a breach absent an
independent duty of care under tort law. See Battista v. Lebanon Trotting Assn.,
538 F.2d 111, 117 (6th Cir.1976) (citing Ketcham v. Miller, 104 Ohio St. 372, 136 N.E.
145 [1922]). See also Motorist Mut. Ins. Co. v. Said, 63 Ohio St.3d 690, 590 N.E.2d
1228 (1992) (recognizing that a bad faith claim against an insurer arises separately
from a claim based on the breach of the insurance contract, as the duty of good faith
towards its insured is implied by law, even though the tort of bad faith arises as a
consequence of a breach of a duty established by a particular contractual
relationship), overruled in part on other grounds, Zoppo v. Homestead Ins. Co., 71
Ohio St.3d 552, 644 N.E.2d 397 (1994), paragraph one of the syllabus.
{¶142} Admittedly, there is overlap in the contractual and tort-based claims
because the contracts incorporate the regulatory rules of the relevant governing
authorities and the fiduciary duties alleged by LaWarre and Papa are defined in part
by those regulatory rules. But to the extent that the tort claims are founded upon an
independent legal duty arising out of the relationship of the parties, rather than
contractual duties, they are not barred by the economic-loss rule.
IX. Statutory-Violation Claims
{¶143} Both LaWarre and Papa alleged that Fifth Third Securities violated
the Kentucky Securities Act in its sale of securities from its branch office in
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OHIO FIRST DISTRICT COURT OF APPEALS
Burlington, Kentucky. LaWarre alleged also that Fifth Third Securities’s provision
of investment advice and sale of securities in Ohio violated Ohio’s Securities Act.
Fifth Third Securities moved for summary judgment on these claims without
addressing the substance of the statutory claims, instead arguing, in general terms,
that summary judgment was warranted under Herbert, and that the plaintiffs had
failed to establish causation as a matter of law because the losses had occurred after
the plaintiffs’ fiduciary relationship with Fifth Third Securities had ended.
{¶144} But Fifth Third Securities’s arguments are not supported by the law.
The court in Herbert did not discuss liability under Ohio’s or Kentucky’s Securities
Acts. And Fifth Third Securities failed to identify a provision in either act that
precludes an award of damages for losses incurred after the termination of the
fiduciary relationship. Thus, the trial court erred by granting summary judgment to
Fifth Third Securities on those grounds.
X. Claims Based on Collins’s Failure to Accurately Report Balances
{¶145} The final claims against Fifth Third Securities are based on Collins’s
receipt and review of LaWarre’s monthly Fidelity investment statements in 2008 and
2009. LaWarre alleged that Fifth Third Securities was liable to him for the breach of
an oral contract, or alternatively, under a theory of negligence or promissory
estoppel. Fifth Third Securities moved for summary judgment on these claims on
the ground that there was no evidence in the record that LaWarre spoke with anyone
at Fifth Third Securities regarding a review of account statements or a reporting of
monthly balances. But LaWarre presented evidence that Collins was dually
employed by the bank and the securities firm. Therefore, Fifth Third Securities was
not entitled to summary judgment on this ground.
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OHIO FIRST DISTRICT COURT OF APPEALS
{¶146} Next, Fifth Third Securities argued that summary judgment was
warranted because there was no evidence that LaWarre sustained any damages
caused by any alleged breach of a duty or promise by Fifth Third Securities. But
LaWarre presented evidence that he would have stopped investing with Hughes
before suffering massive losses in January 2009 if he had been aware that Hughes
was fraudulently concealing his monthly losses, which were greater than $500,000.
{¶147} Finally, Fifth Third Securities argued that summary judgment was
appropriate on the negligence-in-reporting claim based on the economic-loss
doctrine. I agree with the majority that summary judgment was proper on that
ground. Fifth Third Securities did not owe a fiduciary duty to LaWarre at that point
in time, and LaWarre did not pursue the claim as a negligent-misrepresentation
claim. Thus, under these circumstances, any duty that Fifth Third Securities owed
to LaWarre to exercise reasonable care in reporting the account balances arose only
by contract.
XI. Claims Against Fifth Third Bank
{¶148} The plaintiffs filed an amended complaint alleging that defendant
Fifth Third Bank: (1) is liable for the breach of various fiduciary duties; (2) is liable
under common law negligence theory for recommending an “unsuitable investment;”
(3) is liable for negligent misrepresentation for representing the Options Strategy as
a “low-risk suitable strategy”; (4) is liable for the negligent supervision of its
employees, including Hughes, Collins, and Sturgeon; (5) is liable for violations of the
Kentucky Securities Act; and (6) is liable for fraud for the misrepresentation and
concealment of facts. Additionally, LaWarre presented separate claims alleging that
Fifth Third Bank (1) is liable to him for violations of the Ohio Securities Act and (2)
is liable to him for Collins’s conduct in reporting his monthly portfolio balances
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OHIO FIRST DISTRICT COURT OF APPEALS
under the theories of breach of fiduciary duty, breach of contract, negligence, and
promissory estoppel.
XII. The Bank’s Motion for Summary Judgment
{¶149} Fifth Third Bank moved for summary judgment on all of the plaintiffs’
claims. With respect to the breach-of-fiduciary-duty claim, it argued that it owed no
fiduciary duty to the plaintiffs because the facts demonstrated a mere “debtor-
creditor relationship.” Under Ohio law, a mere debtor-creditor relationship does not
create a fiduciary relationship, absent special circumstances. See, e.g., Groob v.
KeyBank, 108 Ohio St.3d 348, 351, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 22.
{¶150} This principle has been codified in R.C. 1109.15(E), formerly R.C.
1109.15(D), which provides that “[u]nless otherwise expressly agreed in writing, the
relationship between a bank and its obligor, with respect to any extension of credit, is
that of a creditor and debtor, and creates no fiduciary or other relationship between
the parties.”
{¶151} In response, LaWarre and Papa argued that the bank was liable for
the breach of fiduciary duties normally imposed on a broker-dealer because of the
specific facts in this case. For example, there was evidence that Fifth Third Bank and
Fifth Third Securities held themselves out to the public as a single entity called Fifth
Third Investment Advisors; that private bankers Sturgeon and Collins referred the
plaintiffs to Hughes and received or at least were eligible to receive incentive
compensation because of the referral; Sturgeon, Collins, and Hughes had dual
employment agreements and were supervised by the same supervisor; the
refinancing of Papa’s home loan with Fifth Third Bank and the investment of his
home equity were part of the investment strategy of the Fifth Third Investment
Advisors; the use of options trading to fund LaWarre’s payback of a loan with Fifth
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OHIO FIRST DISTRICT COURT OF APPEALS
Third Bank was part of the investment strategy of the Fifth Third Investment
Advisors; and the plaintiffs testified that they were unaware that there were two
separate Fifth Third entities.
{¶152} Neither the trial court nor the majority have reached the merits of this
argument, instead holding that Herbert controls the resolution of the claims because
no losses were suffered until LaWarre and Papa voluntarily transferred their
investment accounts from Fifth Third Securities. In my opinion, however, the
Herbert court did not address whether a bank and brokerage could be liable for
losses caused by the breach of fiduciary duties, but not occurring until after the
termination of the fiduciary relationship, and therefore, the case does not determine
the claims in favor of the bank. Thus, the liability of Fifth Third Bank must be
addressed.
{¶153} To that end, I agree with the plaintiffs that, on this record, which
demonstrates that the Investment Advisory Group employees were agents for both
the bank and the broker-dealer, Fifth Third Bank could be liable for the alleged
breach of fiduciary duties. The blurring of the lines between the broker-dealer and
the bank was such that Fifth Third Bank could be treated as a broker-dealer. See
Scott v. Dime Sav. Bank of New York, FSB, 886 F.Supp. 1073, 1079 (S.D.N.Y.1995).
Thus, Fifth Third Bank was not entitled to summary judgment on the breach of
fiduciary duty claim.
XIII. Fraud and Negligent-Misrepresentation Claims
{¶154} I would also reverse the granting of summary judgment for the bank
on the fraud and negligent-misrepresentation claims. The bank, like Fifth Third
Securities, argued that LaWarre and Papa could not establish the justifiable-reliance
elements of these claims. But as previously discussed, the record contains sufficient
49
OHIO FIRST DISTRICT COURT OF APPEALS
evidence that LaWarre and Papa justifiably relied on the misrepresentations of the
Investment Advisor Group employees, who were dually employed by the bank and
Fifth Third Securities. Therefore, summary judgment was not appropriate on these
claims.
XIV. Economic Loss
{¶155} Finally, the bank argued that the economic-loss rule barred LaWarre’s
and Papa’s negligence-based claims pertaining to the investment services because
they did not have a contract with the bank for investment services. But the record
contains evidence that the bank and the securities firm acted as “one in the same,”
and that the bank owed the plaintiffs a fiduciary duty. Thus, the record contains
evidence of privity or a sufficient nexus that could serve as its substitute. Moreover,
Ohio courts have allowed the recovery of purely economic losses for professional
negligence in the absence of actual privity when the plaintiff is the member of a
limited class whose reliance on the representation is specifically foreseen. See
Haddon View Inv. Co. v. Coopers & Lybrand, 70 Ohio St.2d 154, 436 N.E.2d 212(1982), syllabus (holding that “[a]n accountant may be held liable by a third party for
professional negligence when that third party is a member of a limited class whose
reliance on the accountant’s representation is specifically foreseen.”)
XV. Statutory-Violation Claims
{¶156} LaWarre’s and Papa’s claims based on violations of Ohio’s and
Kentucky’s Securities Acts also survive summary judgment. The Bank generally
moved for summary judgment on these claims, arguing that Herbert was controlling.
But as previously discussed, Herbert did not involve claims under these securities
acts. And the Bank failed to demonstrate that the securities acts precluded the
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OHIO FIRST DISTRICT COURT OF APPEALS
recovery of losses occurring after the Fifth Third investment accounts were closed.
Accordingly, summary judgment was not appropriate on these claims.
XVI. Claims Based on Collins’s Failure to Accurately Report Balances
{¶157} I would affirm the grant of summary judgment to Fifth Third Bank on
LaWarre’s negligence claim based on Collins’s alleged failure to accurately report
account balances to him beginning in May 2008. By September 2007 and onward,
neither Fifth Third Bank nor Fifth Third Securities was providing investment advice
to LaWarre. Thus, there was no evidence that at that point in time LaWarre had a
fiduciary relationship with the bank or any of its employees. Thus, the common law
duty that LaWarre based this claim on did not exist as a matter of law, and any
alleged duty of reasonable care arose solely by Collins’s agreement to review the
documents. Therefore, as recognized by the majority, the negligence claim is barred
by the economic-loss rule.
{¶158} But I would reverse the grant of summary judgment to Fifth Third
Bank on LaWarre’s separate claim against Fifth Third Bank for breach of contract, or
in the alternative, promissory estoppel, based on Collins’s receipt and review of
LaWarre’s monthly Fidelity brokerage statements beginning in mid-2008 to early
2009.
{¶159} LaWarre presented evidence that Collins, as an agent of Fifth Third
Bank, had orally agreed to review his monthly Fidelity statements sent to her by
Hughes and to “confirm the account balances” to him by telephone. As LaWarre
knew, Collins was monitoring the market value of the Fidelity investment account
because the value impacted LaWarre’s ability to repay his loan to Fifth Third.
Further, it is undisputed that Collins was actually receiving and reviewing the
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OHIO FIRST DISTRICT COURT OF APPEALS
statements and that she had had conversations with LaWarre concerning the
statements.
{¶160} LaWarre additionally produced evidence that the contract was
breached and that he suffered damages as a result of the breach. It is undisputed
that Collins failed to detect Hughes’s fraud. And LaWarre presented an affidavit
from a banking expert who opined that Collins’s cursory review of the first page of
the statement fell below industry standards and that she should have detected
Hughes’s fraud from her review of the first statement.
{¶161} This, coupled with evidence that LaWarre had undiscovered losses of
more than $500,000 in options trades beginning in May 2008, an amount that
LaWarre had previously said would result in the termination of his investment
relationship with Hughes and his strategy, creates a genuine issue of material fact as
to whether Collins’s alleged breach contributed to LaWarre’s losses.
{¶162} In sum, summary judgment is not appropriate on the breach-of-the-
oral contract claims because material issues of fact exist as to whether LaWarre and
Collins made such an agreement, the scope of such an agreement, whether Collins
breached the agreement, and whether LaWarre suffered damages as a result of the
breach.
{¶163} Relatedly, if LaWarre cannot prove the existence of an enforceable
contract, he should be able to proceed on his promissory-estoppel claim, which he
pled in the alternative. Four elements must be met for a promissory-estoppel claim
to succeed: (1) a clear and unambiguous promise; (2) reliance upon the promise by
the person to whom the promise is made; (3) the reliance is reasonable and
foreseeable; and (4) the party seeking to enforce the agreement is injured as a result
of his reliance. Weiper v. W.A. Hill & Assoc., 104 Ohio App.3d 250, 260, 661 N.E.2d
52OHIO FIRST DISTRICT COURT OF APPEALS
796 (1st Dist.1995), citing Healey v. Republic Powdered Metals, Inc., 85 Ohio
App.3d 281, 284-285, 619 N.E.2d 1035 (9th Dist.1992); Restatement of the Law 2d,
Contracts, Section 90, (1973).
{¶164} LaWarre unequivocally averred that Collins had agreed to “review”
the statements and to “confirm the account balances” to him. Further, he presented
evidence that Collins knew he was not receiving his Fidelity statements at that time,
and that he was relying on her to help him monitor the portfolio value and check on
Hughes. Finally, LaWarre presented evidence that Collins should have discovered
the fraud and that his reliance on her false information caused him to continue
investing with Hughes in the options investment strategy. Accordingly, I would
reverse the entry of summary judgment on the promissory-estoppel claim.
XVII. Conclusion
{¶165} The trial court misapplied the law with respect to the liability of a
bank and broker-dealer for the breach of fiduciary or contractual duties that cause
economic losses to clients. Thus, I would reverse the trial court’s judgment granting
summary judgment to Fifth Third Securities and Fifth Third Bank on all claims, with
the exception of LaWarre’s separate negligence claim that was based on Collins’s
review of his Fidelity Investment statements.
Please note:
The court has recorded its own entry this date.
53